The Taxation Challenge in Africa: Cause and Effect of Prevailing Social Contracts

programs are most often targeted through a variety of mechanisms (for example, community based, geographical targeting, categorical targeting, proxymeans testing). Yet, the decision to target, and how to do it, can have significant implications beyond the program itself: Is it considered fair? When are errors of inclusion acceptable to avoid exclusion? Is there a legitimate actor, even if not the state, that can justify the targeting and the mechanism chosen? How do considerations about the social contract enter when making these decisions?

Program conditionality can consolidate state authority, cement the rule of law, and contribute to the building of human capital through investments in health and education, for example. In doing this, conditionalities reflect, but can also impose, a social contract arrangement between citizens and the state. Thus, which conditionalities can strengthen the overall social contract at the local and national level? Which behaviors can generate a virtuous cycle to help communities and countries move to a better equilibrium in their social contract? Are there cases in which conditions can have negative effects on social contract dynamics? Background work commissioned for this report (Dreier, Alik-Lagrange, and Lake 2020) illustrates these patterns with specific programmatic examples, highlighting promising avenues for advancing democratic accountability and citizen participation while guarding against strengthened authoritarian control.

The Taxation Challenge in Africa: Cause and Effect of Prevailing Social Contracts

Many countries in Africa struggle to collect taxes, partly both a cause and a consequence of prevailing social contracts. The collected tax1 to gross domestic product (GDP) ratio in the region is, on average, 19 percent, but there is wide variation across countries, with taxes equating to less than 1 percent of GDP in Somalia and between 7 and 10 percent in countries such as Angola, Ethiopia, and Madagascar. In contrast, in Namibia and South Africa, taxes equate to about 27–28 percent of GDP.2 In countries where tax collection is low, the capacity of the state to provide services is undermined, thus possibly undermining the stability of the social contract. Hence, a key challenge for many countries in Africa is to be able to increase taxation and to improve the accompanying use of resources.

The World Bank, through its Innovations in Tax Compliance project, which accounts for social contract dynamics, has developed a conceptual framework for developing more effective approaches to tax reform and compliance in developing countries (Prichard et al. 2019). The project places fiscal contracts squarely at the center of its approach to tax reform. It goes beyond traditional approaches that rely solely on enforcement and facilitation and brings in trust. By combining

complementary investments in enforcement and facilitation with trust, reformers can not only strengthen enforced compliance but also can (1) encourage quasi-voluntary compliance, (2) generate sustainable political support for reform, and (3) create conditions that are more conducive to the construction of stronger fiscal contracts. This approach raises the question of what the relation is between taxation, fiscal contracts, and dynamic social contracts as illustrated by figure 3.1 in this report. The tax compliance framework of the fiscal contract connects to many aspects of the social contract framework proposed in this report, including the relation between state capacity, tax enforcement, and revenue mobilization; the importance of the citizen-state bargain in the reform process; and the fiscal contract as a driver of responsiveness and state accountability, an idea also explored in the spotlight on natural resources.

Taxation is an integral part of many social contracts; it is the result of a bargaining process between citizens and states. Put in its simplest form, states seek to raise revenue, and citizens expect to receive services in exchange while also trying to minimize their tax liabilities. Although states can coerce citizens into paying, they typically do not have the capacity to coerce taxpayers into full compliance. Therefore, states have to make concessions to taxpayers to secure quasi-voluntary compliance. Put differently, citizens will be less reluctant to pay their taxes if they are satisfied with what they receive in return for their taxes and if they feel like they have influence over what happens with their taxes. Taxation thus generates incentives for explicit and implicit “tax bargaining” between citizens and states, as increased tax collection is exchanged for greater responsiveness and accountability. In turn, this process may provide the basis for the construction of durable fiscal contracts (Levi 1988; Moore 2004), which contribute in important ways to social contract outcomes, strengthening the overall social contract.

Through its impact on the social contract, taxation contributes to statebuilding by possibly bringing about more capable, responsive, and accountable governments. Research highlights the historical centrality of taxation to statebuilding and the expansion of political accountability in early modern Europe in particular. In their search for revenue to finance wars, states expanded taxation but were also forced to expand accountability to secure the support and tax compliance of wealthy taxpayers, leading to the emergence of national assemblies (Tilly 1990). The availability of alternative sources of finance, such as aid and natural resource revenues, has cast some doubt on whether this mechanism still works for contemporary developing countries (Moore 2015). This challenge is particularly salient in a number of African countries, where the ability to raise tax revenues from other sources is limited, increasing reliance, when the resources exist, on these other forms of revenue where the stakes for the population tend to be more obscure, making accountability more difficult. However, a growing body of literature suggests that taxation still contributes to